2 Chapter Goals To gain an understanding of: Price competition and value pricingPricing strategies for market entry: skimming and penetration pricingPrice discounts and allowancesGeographic pricing strategiesSpecial strategies including one-price, flexible-price, price lining, resale price maintenance, leader pricing, everyday low price, odd pricingLegal issues associated with pricing
3 Pricing Strategyhow does a company decide what price to charge for its products and services?what is “the price” anyway? doesn’t price vary across situations and over time?some firms have to decide what to charge different customers and in different situationsthey must decide whether discounts are to be offered, to whom, when, and for what reason
4 Price vs. Nonprice Competition In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services.In nonprice competition, a seller has stable prices and stresses other aspects of marketing.With value pricing, firms strive for more benefits at lower costs to consumer.With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm.
5 Nonprice Competitionsome firms feel price is the main competitive tool, that customers always want low pricesother firms are looking for ways to add value, thereby being able to avoid low pricessometimes prices have to be changed in response to competitive actionsmany firms would prefer to engage in nonprice competition by building brand equity and relationships with customers
6 Relationship PricingUses price as a method to build long-term relationships with the best customersFocuses on giving better deals to better customersGoal is to price relative to the value of the customer to the firm, while building loyalty and stimulating repeat buying
7 The Price Determination Process In pricing, an organization first must decide on its pricing goal.The next step is to set the base price for a product.The final step involves designing pricing strategies that are compatible with the rest of the marketing mix.Many strategic questions must be answered:Will our company compete on the basis of price or other factors?What kind of discount schedule (if any) should be adopted?
8 SELECT PRICING OBJECTIVE The Process: An IllustrationSELECT PRICING OBJECTIVESELECT METHOD OF DETERMINING THE BASE PRICE:Cost-pluspricingPrice based onboth demandand costsPrice set inrelation tomarket aloneDESIGN APPROPRIATE STRATEGIES:Price vs. nonpricecompetitionSkimming vs.penetrationDiscounts and allowancesFreight paymentsOne price vs.flexible pricePsychological pricingLeader pricingEveryday low vs.high-low pricingResale pricemaintenance
9 Market Entry Pricing Strategies Market-Skimming Pricing: Setting a high initial price for a new product.Works if product is new, distinctive and desiredEarly in Product Life Cycle, when demand inelasticProtected by entry barriers, e.g. patentsMarket-Penetration Pricing: Setting a low initial price for a new product.Works if large market, elastic demandEconomies of scale are possibleFierce competition
10 Discounts and Allowances Quantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.Trade discounts: Reductions from list for functions performed-- storage, promotion.Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)
11 Calculating a Cash Discount 3/10, NET 30Percentage to bededucted if bill ispaid within specifiedtimeNumber of days fromdate of invoice inwhich bill must bepaid to receive cashdiscountNumber of days fromdate of invoice afterwhich bill is overdue1/7, NET 30
12 Other Discounts and Allowances Seasonal DiscountsForward DatingPromotional Allowances
13 The Competition ActPredatory pricing: Selling at unreasonably low prices to lessen competition.Price discrimination: The use of different prices for different customers.It is illegal if a price advantage is granted to one, but not another, where both compete and the articles are similar.Granting promotional allowances must be done on a proportionate basis to all customers.
14 Geographic Pricing Strategies F.O.B. Point-of-Production pricing: Price quoted at factory-- buyer pays transportation.Uniform delivered pricing: Same delivered price quoted to all; works if transportation costs small.Zone-delivered pricing: Set same price within several zones, e.g. Maritimes, Quebec.Freight-absorption pricing: Seller absorbs transport cost to penetrate market.
15 Special Pricing Strategies firms may adopt a one-price strategy or charge different prices to different customersflexible pricing strategies: shoppers may pay different prices if they buy the same quantity
16 Psychology of Pricingthe psychology of pricing suggests that price will convey a message about the product or service being soldleader pricingbait pricingprestige pricingprice lining involves setting prices at a small number of fixed levels within a retail storeodd pricing is often used to suggest a bargain, while even pricing is used more in prestige, fashion stores
17 Questionable Pricing Practices resale price maintenance involves a supplier requiring that intermediaries sell a product at a certain price: illegal in Canada, firms are allowed to specify a “suggested” retail pricesome firms reduce prices, possibly even below cost, to attract customers; this form of “loss-leader” pricing is not illegal unless it persists for a long time with the goal of eliminating competition (predatory pricing)
18 Everyday Low Price (EDLP) vs. High/Low Pricing In EDLP pricing, a retailer charges a constant, low price with no temporary discounts. For example: Wal-Mart, Price Club, and Saturn.In high-low pricing, a retailer charges higher prices but then runs frequent promotions in which prices are temporarily lowered.